Microeconomics Midterm 3 (11, 12, 13) - Custom Scholars
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# Microeconomics Midterm 3 (11, 12, 13)

question
Technology
The process a firm uses to turn inputs into outputs.
question
Positive Technological Change
Ability to produce more output using the same inputs.
question
Negative Technological Change
Using the same inputs → output declines.
question
Short Run
The period of time in which at least one input is fixed.
- factory, store, office
question
Long Run
The period of time in which a firm can vary ALL of its inputs.
question
Variable Costs
Costs that changes as output changes.
question
Fixed Costs
Costs that remain constant as output changes.
question
Total Cost =
Fixed Cost + Variable Cost
question
Explicit Cost
A cost that involves spending money.
question
Implicit Cost
A non-monetary opportunity cost.
- no salary for your own company → non-monetary opportunity cost = salary you COULD'VE gotten working at another job.
question
Economic Depreciation
The difference between what you pay for capital (e.g. car) at the beginning of the year and what you would receive if you sell it at the end of the year.
question
Marginal Product of Labor
The additional output a firm produces as a result of hiring one more worker.
question
Law of Diminishing Returns
Adding more of a variable input (e.g. labor) to same amount of fixed input (ovens), will cause the marginal product of the variable input to decline.
question
Average Product of Labor Equation
The total output produced DIVIDED by the quantity of workers.
= Q/L
question
Average Product of Labor Definition
Average of marginal products of labor.
question
Average Total Cost Equation
= TC/Q
(Total Cost / Output)
question
Marginal Cost Definition
The change in a firm's total cost from producing one more unit.
question
Marginal Cost Equation
= ΔTC/ΔQ
question
Average Fixed and Variable Cost Equation
AFC = FC/Q
AVC = VC/Q
question
ATC =
AFC + AVC
question
When MC < ATC...
ATC ↓
question
When MC > ATC...
ATC ↑
question
A long run average cost curve shows...
The lowest cost at which a firm is able to produce a given quantity of output.
question
Diseconomies of Scale
Long run average cost increases as we increase quantity.
question
Constant Returns to Scale
Long run average cost remains unchanged as we increase quantity.
question
Economies of Scale
Long run average cost decreases as we increase quantity.
question
Minimum Efficient Scale
The lowest level of output at which all economies of scale are exhausted.
question
Why a firm experiences economies of scale?
1. Firm's Technology
2. Workers become more specialized
3. Able to purchase inputs at lower prices
4. Able to borrow money at a lower interest rate
question
Why a firm experiences diseconomies of scale?
The firm gets too large to be managed effectively.
question
Market Structure
How firms interact with buyers to sell their output.
question
Perfect Competition
1. Many Firms
2. Identical Products
3. Very easy to enter
(wheat / poultry farming)
question
Monopolistic Competition
1. Many Firms
2. Differentiated Products
3. Very easy to enter
(restaurants / clothing)
question
Oliglopoly
1. Few Firms
2. Identical OR Different Products
3. NOT easy to enter
(manufacturing / cars)
question
Monopoly
1. ONE firm
2. Unique Products
3. Entry Blocked
(USPS / First Class. Providing Tap Water)
question
In a perfectly competitive market the firm faces a ___________________ demand.
HORIZONTAL
question
Why is the demand horizontal in a perfectly competitive market?
- There are many firms
- Product is identical
→ Firm can NOT influence the price (PRICE TAKERS!!!!)
question
Profit Equation
= Total Revenue - Total Cost
= TR - TC
question
Average Revenue Equation
= TR / Q = (P x Q) / Q = P
question
Marginal Revenue Definition
Additional revenue from selling one more unit.
question
Marginal Revenue Equation
= ΔΤR / ΔQ = P
question
In a perfectly competitive market price (P) is equal to....
- MR
- Average Revenue

SO

P = MR = Average Revenue
question
Rules for Profit Maximization
1. Where the difference between TR and TC is largest (POSITIVE)
2. Where MC = MR
(MR = P → P = MC)
question
Equation for Profit Maximization
Profit = (P - ATC) x Q
question
When P > ATC....
Profits are positive
question
When P = ATC...
Profits are ZERO
question
When P < ATC...
Profits are NEGATIVE
question
Shut Down Condition for Perfect Competition
P < AVC → Firms will NOT produce output
question
The firm's MC curve in perfect competition is its _________ curve ONLY for prices ____ or _________ AVC.
1. Supply
2. At
3. Above
question
Break Even
Zero Economic Profit
question
Long Run Competitive Equilibrium
Firms entering/exiting the market until the firms which remain in the market break even.
question
Competition in the long run drives prices to.....
P = Minimum Long Run Average Total Cost
question
Constant Cost Industry
- Indicated by a horizontal supply line
question
Increasing Cost Industry
- Some factors of production cannot be replicated
- Upward Sloping
e.g. wine → ↑P of land → ↑Cost
question
Decreasing Cost Industry
- One firm can generate benefits for other firms
- Downward Sloping
e.g. nike shoes → synthetic rubber
question
Productive Efficiency
The good is produced at the lowest possible cost.
question
Allocative Efficiency
Production is in accordance w/ consumer preferences
MB = MC
question
Perfect Competition is BOTH ______________ & ________________ Efficient
1. Productive
- P = MC, P = Minimum ATC
2. Allocative
- MB = MC
question
Price Effect
Loss revenue due to lower prices.
question
Output Effect
Gain in revenue from increase in output.
question
Each firm that has the ability to affect the price will have a __ _________ below its demand curve.
- MR Curve
question
How a Monopolistic Firm Maximizes Profits in the Short Run
1. MR = MC
(go up to ATC and D)
question
More firms entering in the monopolistic market =
Short run positive economics profits
question
In the Long Run in a Monopolistic Market...
1. Demand curve will shift to the left
2. Become MORE elastic → consumers have more substitutes
question
A Monopolistic Competition is NOT ________ & ________ Efficient
1. Productive
- P DOES NOT EQUAL Min ATC
- MB (P) DOES NOT EQUAL MC
question
Excess Capacity
If the firm increases its output, the firm could produce at a lower ATC.
question
Consumers benefit from...
Product Differentiation
question
What makes a firm successful?
1. Differentiate its product
2. Ability to produce at a lower average cost
1 of 67
question
Technology
The process a firm uses to turn inputs into outputs.
question
Positive Technological Change
Ability to produce more output using the same inputs.
question
Negative Technological Change
Using the same inputs → output declines.
question
Short Run
The period of time in which at least one input is fixed.
- factory, store, office
question
Long Run
The period of time in which a firm can vary ALL of its inputs.
question
Variable Costs
Costs that changes as output changes.
question
Fixed Costs
Costs that remain constant as output changes.
question
Total Cost =
Fixed Cost + Variable Cost
question
Explicit Cost
A cost that involves spending money.
question
Implicit Cost
A non-monetary opportunity cost.
- no salary for your own company → non-monetary opportunity cost = salary you COULD'VE gotten working at another job.
question
Economic Depreciation
The difference between what you pay for capital (e.g. car) at the beginning of the year and what you would receive if you sell it at the end of the year.
question
Marginal Product of Labor
The additional output a firm produces as a result of hiring one more worker.
question
Law of Diminishing Returns
Adding more of a variable input (e.g. labor) to same amount of fixed input (ovens), will cause the marginal product of the variable input to decline.
question
Average Product of Labor Equation
The total output produced DIVIDED by the quantity of workers.
= Q/L
question
Average Product of Labor Definition
Average of marginal products of labor.
question
Average Total Cost Equation
= TC/Q
(Total Cost / Output)
question
Marginal Cost Definition
The change in a firm's total cost from producing one more unit.
question
Marginal Cost Equation
= ΔTC/ΔQ
question
Average Fixed and Variable Cost Equation
AFC = FC/Q
AVC = VC/Q
question
ATC =
AFC + AVC
question
When MC < ATC...
ATC ↓
question
When MC > ATC...
ATC ↑
question
A long run average cost curve shows...
The lowest cost at which a firm is able to produce a given quantity of output.
question
Diseconomies of Scale
Long run average cost increases as we increase quantity.
question
Constant Returns to Scale
Long run average cost remains unchanged as we increase quantity.
question
Economies of Scale
Long run average cost decreases as we increase quantity.
question
Minimum Efficient Scale
The lowest level of output at which all economies of scale are exhausted.
question
Why a firm experiences economies of scale?
1. Firm's Technology
2. Workers become more specialized
3. Able to purchase inputs at lower prices
4. Able to borrow money at a lower interest rate
question
Why a firm experiences diseconomies of scale?
The firm gets too large to be managed effectively.
question
Market Structure
How firms interact with buyers to sell their output.
question
Perfect Competition
1. Many Firms
2. Identical Products
3. Very easy to enter
(wheat / poultry farming)
question
Monopolistic Competition
1. Many Firms
2. Differentiated Products
3. Very easy to enter
(restaurants / clothing)
question
Oliglopoly
1. Few Firms
2. Identical OR Different Products
3. NOT easy to enter
(manufacturing / cars)
question
Monopoly
1. ONE firm
2. Unique Products
3. Entry Blocked
(USPS / First Class. Providing Tap Water)
question
In a perfectly competitive market the firm faces a ___________________ demand.
HORIZONTAL
question
Why is the demand horizontal in a perfectly competitive market?
- There are many firms
- Product is identical
→ Firm can NOT influence the price (PRICE TAKERS!!!!)
question
Profit Equation
= Total Revenue - Total Cost
= TR - TC
question
Average Revenue Equation
= TR / Q = (P x Q) / Q = P
question
Marginal Revenue Definition
Additional revenue from selling one more unit.
question
Marginal Revenue Equation
= ΔΤR / ΔQ = P
question
In a perfectly competitive market price (P) is equal to....
- MR
- Average Revenue

SO

P = MR = Average Revenue
question
Rules for Profit Maximization
1. Where the difference between TR and TC is largest (POSITIVE)
2. Where MC = MR
(MR = P → P = MC)
question
Equation for Profit Maximization
Profit = (P - ATC) x Q
question
When P > ATC....
Profits are positive
question
When P = ATC...
Profits are ZERO
question
When P < ATC...
Profits are NEGATIVE
question
Shut Down Condition for Perfect Competition
P < AVC → Firms will NOT produce output
question
The firm's MC curve in perfect competition is its _________ curve ONLY for prices ____ or _________ AVC.
1. Supply
2. At
3. Above
question
Break Even
Zero Economic Profit
question
Long Run Competitive Equilibrium
Firms entering/exiting the market until the firms which remain in the market break even.
question
Competition in the long run drives prices to.....
P = Minimum Long Run Average Total Cost
question
Constant Cost Industry
- Indicated by a horizontal supply line
question
Increasing Cost Industry
- Some factors of production cannot be replicated
- Upward Sloping
e.g. wine → ↑P of land → ↑Cost
question
Decreasing Cost Industry
- One firm can generate benefits for other firms
- Downward Sloping
e.g. nike shoes → synthetic rubber
question
Productive Efficiency
The good is produced at the lowest possible cost.
question
Allocative Efficiency
Production is in accordance w/ consumer preferences
MB = MC
question
Perfect Competition is BOTH ______________ & ________________ Efficient
1. Productive
- P = MC, P = Minimum ATC
2. Allocative
- MB = MC
question
Price Effect
Loss revenue due to lower prices.
question
Output Effect
Gain in revenue from increase in output.
question
Each firm that has the ability to affect the price will have a __ _________ below its demand curve.
- MR Curve
question
How a Monopolistic Firm Maximizes Profits in the Short Run
1. MR = MC
(go up to ATC and D)
question
More firms entering in the monopolistic market =
Short run positive economics profits
question
In the Long Run in a Monopolistic Market...
1. Demand curve will shift to the left
2. Become MORE elastic → consumers have more substitutes
question
A Monopolistic Competition is NOT ________ & ________ Efficient
1. Productive
- P DOES NOT EQUAL Min ATC
- MB (P) DOES NOT EQUAL MC
question
Excess Capacity
If the firm increases its output, the firm could produce at a lower ATC.
question
Consumers benefit from...
Product Differentiation
question
What makes a firm successful?
1. Differentiate its product
2. Ability to produce at a lower average cost

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